General information, not lending, tax or legal advice

Mortgage Discount Points and Rate Buydowns in Tennessee

When you get a mortgage, you can often trade cash at closing for a lower interest rate, or trade a higher rate for less cash at closing. Discount points, lender credits and rate buydowns are the tools for those trades. Sellers and builders sometimes offer to pay for a buydown as part of a deal, so buyers in Manchester and Coffee County ask about them often.

This guide explains how each one works, where they show up on your loan paperwork, how to think about whether paying points makes sense and how the loan programs and the IRS treat them. It is general information from the Consumer Financial Protection Bureau (CFPB), federal rules, the IRS, Fannie Mae, VA and HUD. It is not lending, tax or legal advice, and it does not quote any interest rates. Your lender sets the actual rate and pricing for your loan.

What a discount point is

The CFPB says points, also called discount points, lower your interest rate in exchange for paying more at closing. A few basics from the CFPB:

One point equals one percent of the loan amount. The CFPB's own example is one point on a $100,000 loan, which is $1,000.
Points do not have to be whole numbers. The CFPB notes you can pay a fraction of a point, such as half a point.
Points are paid at closing and are added to your closing costs.
More points should mean a lower rate. A loan with one point should have a lower rate than a zero point loan from the same lender for the same kind of loan.

How much the rate drops for each point is not fixed. The CFPB says it depends on the lender, the kind of loan and the overall mortgage market. That is why the only way to know what a point buys you is to ask the lender for a quote with and without points.

The IRS describes points the same way for tax purposes: they are a form of prepaid interest, and each point paid lowers the interest rate on your loan.

Watch the word points

The CFPB warns that some lenders use the word points for any upfront fee figured as a percentage of the loan, whether or not it lowers your rate. Federal rules help here. On the Loan Estimate, 12 CFR 1026.37(f)(1)(i) requires points paid to lower the interest rate to be listed separately, as a percentage of the loan and a dollar amount, with the label "% of Loan Amount (Points)." If you are not paying points to lower the rate, that line must be blank. The CFPB says that by law, points listed on your Loan Estimate and Closing Disclosure must be connected to a discounted interest rate.

Lender credits are points in reverse

The CFPB says lender credits work the same way as points, in reverse. You accept a higher interest rate, and the lender gives you money toward your closing costs. A lender worksheet may call them negative points. The more lender credits you receive, the higher your rate.

The CFPB also notes that a "no closing cost" loan usually still has closing costs. They are covered by a lender credit, which means a higher rate, or added to your loan balance.

Where points show up on your paperwork

Loan Estimate, page 2, Section A. Points are the first item under Origination Charges.
Loan Estimate, page 2, Section J. Lender credits appear as a negative number on the Lender Credits line.
Loan Estimate, page 1. The rate lock section must say that your interest rate, any points and any lender credits can change unless your rate is locked.
Loan Estimate, page 3. The CFPB says the annual percentage rate (APR) appears under Comparisons. The APR reflects the interest rate plus points, broker fees and other charges, so it helps you compare loans with different points.
Closing Disclosure, page 2, Section A. The same points appear again on your final figures, which you should receive at least three business days before closing.

My buyer closing costs guide walks through the rest of the Loan Estimate and Closing Disclosure.

Should you pay points? The break even question

The CFPB says points can be a good choice if you plan to keep your loan for a long time. Its research notes that most borrowers benefit from points only if they keep the mortgage long enough that the monthly savings add up to more than the upfront cost. That point in time is often called the break even period.

The CFPB describes a simple way to estimate it: divide the cost of the points by how much they lower your monthly payment. The answer is roughly the number of months it takes to earn the cost back. If you expect to sell the home or refinance before then, paying points may cost you more than it saves.

The CFPB suggests these steps:

Ask for two options side by side, one with points or credits and one without, from the same lender for the same kind of loan.
Compare three things: the cash you need at closing, the monthly payment and the interest you would pay over the time you expect to keep the loan.
Use three timeframes: the shortest, the most likely and the longest time you can see yourself keeping the loan.
Do not count on refinancing. The CFPB says refinancing is never guaranteed.
Ask for the same points from each lender when you compare offers, because pricing differs from lender to lender.

The CFPB adds that points are less useful if cash is tight or you expect to move or refinance soon. If you are not sure, the CFPB suggests reviewing your options with a HUD approved housing counselor, whom you can reach through HUD at 1 800 569 4287.

Temporary rate buydowns

A temporary buydown is different from points. The CFPB says it gives you a lower mortgage payment for a limited time, usually one to three years, with payments rising each year until the buydown ends. After that you pay the full payment on your note rate for the rest of the loan.

VA describes how the money works: funds are set aside in an escrow account, and each month part of that account is applied to lower your payment. VA lists two common versions, a three two one buydown that lasts three years and a two to one buydown that lasts two years. In each, the reduction steps down by no more than one percent a year.

Key rules from the loan programs:

You qualify at the full rate. Fannie Mae, HUD and VA all require the lender to qualify you based on the full note rate payment, not the lower buydown payment. A buydown helps with the first years, but you need to be comfortable with the full payment.
The note does not change. Fannie Mae says the mortgage documents reflect the permanent payment terms, and the buydown cannot change the terms of the note.
You still owe the full payment. Fannie Mae and HUD say that if buydown funds are not available for any reason, the borrower is still responsible for the full payment under the note.
Limits on the buydown. Fannie Mae allows a reduction of no more than 3 percent below the note rate, a buydown period of no more than three years and increases of no more than 1 percent a year.
Where they are allowed. Fannie Mae allows temporary buydowns on fixed rate loans and certain adjustable rate plans for a principal residence or second home, but not for investment properties or cash out refinances. HUD does not allow temporary buydowns on FHA refinances or FHA adjustable rate loans. VA allows them on fixed rate VA loans.
What happens if you sell or pay off early. Fannie Mae says leftover funds are credited to the payoff or returned as the buydown agreement provides. VA says leftover funds are applied to the loan balance and are not returned to whoever funded them, and HUD does not allow leftover FHA buydown funds to go back to the seller or builder who provided them.

Ask your lender for a written explanation of any buydown. VA says the agreement should show the property address, how long the buydown lasts, its amount, the payment rates during the buydown, the original interest rate and who holds the funds.

When the seller or builder pays

The CFPB says points are typically paid by the borrower but can be paid by the home seller or a third party, such as a homebuilder. A seller can also fund a temporary buydown. The CFPB reminds buyers to negotiate seller paid costs directly with the seller, not the lender. Each loan program counts these payments against its own limit:

Conventional. Fannie Mae counts a buydown paid by the seller or another interested party toward its interested party contribution limits of 3, 6 or 9 percent, depending on your down payment.
FHA. HUD allows the seller and other interested parties to contribute up to 6 percent of the sales price toward closing costs, prepaid items and discount points, and that 6 percent includes permanent and temporary buydowns.
VA. VA says a temporary buydown paid by the seller or builder is a seller concession that counts toward its 4 percent cap. VA's lender training says a seller paying reasonable discount points is not a seller concession. VA also lists loan discount points among the closing costs a buyer and seller can negotiate.
THDA. THDA says Great Choice loans are 30 year fixed rate loans and the borrower may not buy down the rate with discount points.

A seller paid buydown, points or a price reduction can each help a buyer in a different way. My seller concessions guide explains the limits in more detail, and we can compare the options for your situation before writing an offer.

How points work for loan types here

Most Coffee County buyers use a loan. In Realtracs MLS data for October 2025 through September 2026, 363 of the 862 Coffee County residential sales closed with conventional financing, 161 with FHA and 91 with VA, while 167, or 19.4 percent, closed as cash sales. See how Coffee County homes were bought for the full breakdown. Points and buydowns are available on many of these loans, but the rules differ, so read my guides to conventional loans, FHA loans and VA home loans, and ask your lender what it offers.

VA also notes that on a VA purchase loan, only the funding fee can be financed into the loan amount, so points on a VA purchase are paid at closing by you or, if negotiated, by the seller.

Points and your taxes

The IRS explains the tax side in Topic 504 and Publication 936:

You must itemize. Points can be deductible as home mortgage interest only if you itemize deductions on Schedule A.
Deducting in the year you pay. For a loan to buy your main home, you may be able to deduct points in the year paid if you meet the IRS tests. These include that paying points is an established practice in the area, the points are not more than generally charged there, they are figured as a percentage of the loan, they show clearly as points on your settlement statement, and the funds you provided at or before closing are at least equal to the points.
Otherwise, over the loan. Points are generally deducted ratably over the life of the loan, including points on a refinance or on a second home.
Points the seller pays. The IRS treats points the seller pays as if you paid them, as long as you subtract them from the basis of your home. The seller cannot deduct them as interest, but they are a selling expense for the seller.
Not every fee is a point. The IRS says appraisal fees, note preparation, notary fees, mortgage insurance premiums and points charged in place of other closing costs are not deductible as interest.
Form 1098. Your lender's statement shows the points paid during the year, including seller paid points.

Tax rules depend on your situation, so ask a tax professional before counting on a deduction.

Questions to ask your lender

What rate do I get with zero points, and what does each point lower it by?
Are any of these points tied to the rate, or are they fees?
What lender credit could I get for a higher rate, and how much higher?
Is my rate and pricing locked, and until when?
If the seller pays for a buydown, how does it count against my loan's limit?
For a temporary buydown, what is my full payment after it ends, and what happens to leftover funds if I sell or refinance?

The CFPB says multiple mortgage credit checks within a 45 day window count as a single inquiry, so you can get quotes from several lenders. My mortgage preapproval guide explains how to shop.

How I help

I do not set rates, sell loans or give tax advice. What I do is help you ask lenders the right questions, compare a buydown, points, a closing cost credit or a price change when we negotiate, and make sure the agreement with the seller is written clearly so your lender can use it.

Keep reading:

Fair housing note: I work with every buyer and seller and follow the same steps for everyone. Federal law also prohibits lenders from discriminating against any applicant on a prohibited basis.

This guide is general information from public sources, not lending, tax or legal advice. Loan program rules and tax rules can change, so confirm the details with your lender and a tax professional.

Buying in Manchester?

I can help you weigh points, buydowns and seller credits before you make an offer. Call or text me at (615) 497 1658, or request my buyer guide below.

Common questions

What are mortgage discount points?

The CFPB says discount points are an upfront fee you pay at closing in exchange for a lower interest rate. One point equals one percent of the loan amount, so one point on a $100,000 loan is $1,000. How much each point lowers the rate depends on the lender, the loan and the market.

Where do points show up on my Loan Estimate?

Points paid to lower the rate are the first item under Origination Charges in Section A on page 2, shown as a percentage of the loan and a dollar amount. Federal rules require that line to be blank if you are not paying points. Lender credits appear as a negative number in Section J.

Is it worth paying points?

The CFPB says points usually pay off only if you keep the loan long enough for the monthly savings to exceed the upfront cost. Estimate the break even by dividing the cost of the points by the monthly savings. If you expect to move or refinance sooner, points may not make sense.

What is a temporary rate buydown?

A temporary buydown lowers your payment for a limited time, usually one to three years, with payments rising each year until you reach the full payment on your note rate. Common versions are a two to one buydown lasting two years and a three two one buydown lasting three years. Lenders qualify you at the full rate.

Can the seller pay for my points or a buydown?

Yes, within each loan program's limits. Fannie Mae counts an interested party buydown toward its 3, 6 or 9 percent limits, HUD includes buydowns in the FHA 6 percent limit, and VA counts a seller paid temporary buydown toward its 4 percent concession cap. THDA Great Choice loans do not allow buying down the rate.

Are mortgage points tax deductible?

They can be if you itemize. The IRS lets you deduct points on a loan to buy your main home in the year paid if you meet its tests; otherwise points are deducted over the life of the loan. Points the seller pays are treated as paid by you, and you subtract them from your basis. Ask a tax professional.

Matt Sargent is a Tennessee licensed affiliate broker with Keller Williams who helps buyers and sellers in Manchester and Coffee County. Call (615) 497 1658 or send a message.